Exam #2 Principles of Microeconomics Econ1014 Fall 2012 Blue version

Do not open this exam or begin writing until you are told to begin. When you are told to begin, first write your name, student ID and exam version on your scantron form and fill in the bubbles for your name and ID. Be sure to read directions carefully, use your exam copy to help you solve the problems and transfer all your answers to the scantron form. Only answers bubbled into the scantron form before time is called will be accepted. No work on the exam copy itself will be graded. You will not be given time to fill in any scantron answers after time is called, so make sure to do this before time is called. You are allowed to use only a pencil, eraser and ruler for the exam. Any other materials used or in sight are prohibited. In particular, you are NOT allowed the use of a calculator or any translation device. Failure to follow these directions is considered cheating and will result in a grade of zero for this exam. You must stop writing and put down your pen or pencil immediately when you are told it is time to stop the exam. Failure to follow these directions is considered cheating and will result in a grade of zero for this exam. There will be 40 questions worth 1 point each and 8 questions worth 2 points each out of a total of 56 points. Your score will then be weighted to give you a possible 200 points for the entire exam. Please choose the best answer possible in each case.
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Figure A: Use this graph to answer the following 10 questions

Price per gallon($)
20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Supply

Demand
0 10 20 30 40 50 60 70 80

Quantity (millions of gallons of gasoline)

90

100

110

120

1. (2 points) Refer to figure A: Using the point-slope formula, what is the price elasticity of demand when the market price is $8 per gallon? 1. -1 2. 3/2 3. -2/3 4. -12/40 5. None of the above 2. Refer to Figure A: At which price are consumers of gasoline most price responsive? 1. $16 per gallon 2. $10 per gallon 3. $4 per gallon 4. Consumers are equally responsive to price changes at all prices along a single demand curve. 5. Impossible to determine with the information given 3. Refer to Figure A: Assuming no market failures have occurred, what is the economically efficient amount of gasoline consumption? 1. 40 million gallons 2. 60 million gallons 3. 20 million gallons 4. Impossible to determine with the information given 5. None of the above

4. Refer to Figure A: How much economic surplus do gasoline consumers earn from the free market allocation of gasoline? 1. $720 million 2. $480 million 3. $120 million 4. $240 million 5. None of the above 5. Refer to Figure A: How much economic surplus do gasoline producers earn from the free market allocation of gasoline? 1. $720 million 2. $480 million 3. $120 million 4. $240 million 5. None of the above 6. (2 points) Refer to Figure A: How much economic surplus would be earned in total if this market were producing and consuming 60 million gallons? 1. $540 million 2. $450 million 3. $270 million 4. $180 million 5. None of the above 7. Refer to Figure A: How much economic surplus would be earned on the 10 millionth gallon? 1. $8 2. $3.5 3. $17 4. $13.5 5. None of the above 8. Refer to Figure A: The consumer of the 10 millionth gallon of gasoline has a reservation price equal to: 1. $8 2. $3.5 3. $17 4. $13.5 5. None of the above 9. Refer to Figure A: The producer of the 80 millionth gallon of gasoline has a marginal cost of production equal to: 1. $0 2. $14 3. $8 4. Impossible to determine with the information given. 5. None of the above 10. Refer to Figure A: How much revenue would firms be able to earn if they charge a price of $14 per gallon? 1. $300 million 2. $2100 million 3. $140 million 4. $280 million 5. None of the above

11. According to the article To Reduce the Cost of Teenage Temptation, Why Not Just Raise the Price of Sin? researchers have found that a 1% increase in the price of smoking leads to a 1% reduction in smoking while a 1% increase in the price of drinking leads to a 1% to 4% reduction in drinking. Which of the following can we conclude from this information? 1. Smoking is unit price elastic. 2. Drinking is more price elastic than smoking. 3. Drinking is price elastic. 4. All of the above 5. None of the above 12. According to the article Alcohol and Marijuana Use Among College Students, university campus bans on alcohol use (which tend to increase the cost of these products) have a stronger impact on female than on male students. Based on this information we can conclude that: 1. Female students are more price responsive than male students. 2. Female students are less price responsive than male students. 3. Female students are more cross-price elastic than male students. 4. Female students dont like alcohol and marijuana as much as male students. 5. Impossible to determine with the information given. 13. If the price elasticity of demand for computers is equal to -2, you can conclude that: 1. Consumers do not feel like there are any good substitutes for computers. 2. Consumers are fairly responsive to changes in the price of computers. 3. If computer producers try to lower their prices, they will suffer a decrease in their revenues. 4. all of the above. 5. none of the above. 14. Suppose the National Bureau of Economic Research (NBER) estimates that the price elasticity of demand for cocaine is equal to -1.5. If this number is correct, then any government policy which resulted in a 40% increase in cocaine prices should result in: 1. a 40% decrease in desired cocaine purchases. 2. a 60% decrease in desired cocaine purchases. 3. a 40% increase in desired cocaine purchases. 4. a 2.67% decrease in desired cocaine purchases. 5. none of the above. 15. Suppose you are selling a product and you know that the price elasticity of demand is equal to -1. What does this tell you about the price you are charging? 1. If you are interested in maximizing your revenues, you should raise your price. 2. If you are interested in maximizing your revenues, you should lower your price. 3. If you are interested in maximizing your revenues, you should raise your price if you are selling a normal good, but you should lower your price if you are selling an inferior good. 4. If you are interested in maximizing your revenues, you should neither raise nor lower your price. 5. None of the above 16. Suppose we wish to guarantee all Americans access to free health care. In order to finance this system of universal health care coverage, we are considering three different methods of raising the money. One involves increasing the personal income tax paid by workers. The second involves increasing the corporate income tax paid by firms. The third involves introducing a federal sales tax. For an economist, which of the following statements explains how the government should choose between these three potential financing methods? 1. Choose the method that produces the least deadweight loss. 2. Choose the method that raises the most money. 3. Choose a combination of the three methods so that everyone pays fairly. 4. Choose the personal income tax since consumers are getting the benefits of the health coverage, therefore, they should be paying for it. 5. None of the above.

Figure B: Use this graph to answer the following 8 questions

Price per gallon($)
20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Supply

Demand
0 10 20 30 40 50 60 70 80 90

New Demand
100 110 120

Quantity (millions of gallons of gasoline)

17. Refer to Figure B: The demand shift shown in the graph could be a result of a _____ placed on gasoline consumers. 1. $9 subsidy 2. $3 subsidy 3. $3 tax 4. $9 tax 5. None of the above 18. Refer to Figure B: The government policy that resulted in the demand shift shown in the graph will result in misallocation of resources equal to _____ and loss of economic surplus equal to _____. 1. RM=0; DWL=$0 2. RM=30 million gallons too many; DWL=$45 million 3. RM=20 million gallons too many; DWL=$90 million 4. RM=30 million gallons too few; DWL=30 million gallons too few 5. None of the above 19. (2 points) Refer to Figure B: If the government policy that resulted in the demand shift shown in the graph was caused by a tax or subsidy, it will result in buyers price _____ and sellers price ______. 1. Falling to -$1 per gallon; staying at $8 per gallon 2. Rising to $11 per gallon; falling to $2 per gallon 3. Rising to $17 per gallon; staying at $8 per gallon 4. Falling to $2 per gallon; rising to $11 per gallon 5. None of the above

20. (2 points) Refer to Figure B: Based on what has happened to buyers price and sellers price, we can predict that ____ are more responsive to price changes and _____. 1. Sellers; Es>|Ed| 2. Sellers; Es<|Ed| 3. Buyers; Es>|Ed| 4. Buyers; Es<|Ed| 5. Impossible to determine from the information given 21. Refer to Figure B: Suppose the demand shift shown in the graph is a result of a 10% increase in the price of a related good. Based on this information, we can predict that the related good is ____ to gasoline. 1. a substitute 2. a complement 3. inferior 4. superior 5. None of the above 22. (2 points) Refer to Figure B: Suppose the demand shift shown in the graph is a result of a 10% increase in the price of a related good. Based on this information, we know the cross-price elasticity of demand for the related good and gasoline is equal to _____. 1. +5 2. -5 3. +3 4. +7.5 5. Impossible to determine from the information given 23. Refer to Figure B: At the original market equilibrium outcome, buyers price is equal to ____ and sellers price is equal to _____. 1. $20; $2 2. $2; $20 3. $8; $8 4. $11; $11 5. None of the above 24. Refer to Figure B: The demand shift shown in the graph could be the result of: 1. An increase in income if gasoline is a normal good. 2. A decrease in income if gasoline is an inferior good. 3. A decrease in the price of a complementary good. 4. All of the above. 5. None of the above. 25. According to the article Majority of Americans Support Price Controls on Gas, 1. Price controls artificially hold down the price, which reduces the incentive on the part of consumers to use less and the incentive for producers to produce more. 2. If the U.S. government decides to impose price controls on the gasoline market, this would be the first time price controls have ever been used in the U.S. gasoline market. 3. Price controls simply would not be effective at holding down gas prices because there is no way for the government to enforce them. 4. All of the above 5. None of the above

26. Suppose you are selling a product and you know that the price elasticity of supply is equal to 1. What does this tell you about the price you are charging? 1. If you are interested in maximizing your revenues, you should neither raise nor lower your price. 2. If you are interested in maximizing your revenues, you should raise your price. 3. If you are interested in maximizing your revenues, you should lower your price. 4. If you are interested in maximizing your revenues, you should raise your price if you are selling a normal good, but you should lower your price if you are selling an inferior good. 5. None of the above 27. Suppose the price elasticity of supply is equal to 2. This tells us: 1. The change in quantity supplied is only half as big as the change in price. 2. The change in quantity supplied is twice as big as the change in price. 3. Any change in price will result in a relatively large shift of the supply curve to the right. 4. The firm should raise its price if it wants to earn more revenue. 5. None of the above 28. Suppose that the price of good x has just increased, and as a result you observe a decrease in the demand for good y. From this, you would be able to conclude that: 1. good y is a normal good. 2. goods x and y are complements. 3. good y is an inferior good. 4. goods x and y are substitutes. 5. consumers of good y are price elastic.

Figure C: Use this graph to answer the following 8 questions

Price per gallon($)
20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Supply Price control

Demand
0 10 20 30 40 50 60 70 80

Quantity (millions of gallons of gasoline)

90

100

110

120

29. Refer to figure C: The price control in place in the market could be a: 1. Binding price ceiling 2. Non-binding price floor 3. Binding price floor 4. Effective tax on buyers or sellers 5. None of the above 30. (2 points) Refer to figure C: It doesnt matter if the price control in place is a price ceiling or a price floor, it will be binding in either case and will result in ______ and _______. 1. No resource misallocation; no deadweight loss 2. No resource misallocation; deadweight loss 3. Resource misallocation, no deadweight loss 4. Resource misallocation; deadweight loss 5. None of the above 31. Refer to figure C: Suppose the price control in place is a price floor. Under this price floor, consumers will wish to purchase ____ and producers will wish to produce ______. 1. Qd=80 million gallons; Qs=80 million gallons 2. Qd=20 million gallons; Qs=20 million gallons 3. Qd=20 million gallons; Qs=80 million gallons 4. Qd=40 million gallons; 40 million gallons 5. None of the above 32. Refer to figure C: Suppose the price control in place is a price floor. The price of the product will be ____ and the amount bought and sold will be _____. 1. P=$14; Q=20 million gallons 2. P=$14; Q=80 million gallons 3. P=$8; Q=40 million gallons 4. P=$14; Q=40 million gallons 5. None of the above 33. Refer to figure C: Suppose the price control in place is a price floor. The market will experience resource misallocation equal to ______ and deadweight loss equal to ______. 1. RM=20 million gallons too few; DWL=$90 million 2. RM= 40 million gallons too many; DWL=$280 million 3. RM=60 million gallons too many; DWL=$300 million 4. RM=20 million gallons too few; DWL=$180 million 5. None of the above 34. Refer to figure C: The economic cost of this price control would be less if the demand curve were: 1. flatter 2. more price elastic 3. more income elastic 4. steeper 5. impossible to determine with the information provided 35. (2 points) Refer to figure C: Suppose the price control in place is a price floor. The price floor will result in consumer surplus _____ from $240 million to ____ : 1. decreasing; $120 million 2. decreasing; $210 million 3. not changing; $240 million 4. decreasing; $60 million 5. none of the above

36. Refer to figure C: Suppose the price control in place is a price floor. The price floor will result in producer income _____ by ____. 1. Falling; $80 million 2. changing; $0 3. falling; $40 million 4. rising; $90 million 5. none of the above 37. According to the article Obama Tax Hikes, how do tax increases affect the cost of productive factors? 1. Tax increases decrease factor costs. 2. Tax increases do not affect factor costs. 3. Tax increases affect factor costs ambiguously. 4. Tax increases increase factor costs. 5. None of the above. 38. According to the article Majority of Americans Support Price Controls on Gas, Gallup polls indicate that 53% of Americans favor imposing price controls to reduce gas prices. Which of the following price controls is meant in this case? 1. Binding price floor. 2. Non-binding price ceiling. 3. Binding price ceiling. 4. Non-binding price floor. 5. None of the above. 39. In order to maximize revenue, if a producer finds demand for its product to be price inelastic, this producer should: 1. lower price 2. raise price 3. keep price the same but increase quantity supplied 4. produce more (increase quantity supplied) 5. none of the above 40. In the absence of market failure, government intervention in the market results in inefficiency for society because: 1. the intervention distorts prices for consumers and consumers change their consumption decisions from what is optimal. 2. the intervention distorts prices for producers and producers change their production decisions from what is optimal. 3. the intervention results in a misallocation of resources. 4. the intervention results in the wrong amount of the good being produced and sold. 5. all of the above. 41. Government policies designed to promote greater equity in society often result in market inefficiency. Explain why these policies result in inefficiency. 1. They distort market price signals which tell consumers and producers how much to consume and produce. 2. They transfer economic surplus from one member of society to another member of society 3. They always result in too little market activity. 4. All of the above. 5. None of the above.

42. If consumers consider Ben and Jerrys ice cream to be a normal good and Kroger brand ice cream to be an inferior good, then when consumer income rises we will predict: 1. Lower demand for Ben and Jerrys ice cream and higher demand for Kroger brand ice cream. 2. Higher demand for Ben and Jerrys ice cream and lower demand f or Kroger brand ice cream. 3. Higher demand for Ben and Jerrys ice cream and higher supply for Kroger brand ice cream. 4. Higher demand for Ben and Jerrys ice cream and lower supply for Kroger brand ice cream. 5. None of the above 43. What do we call the loss of economic surplus that society suffers when the government interferes in a wellfunctioning free market? 1. Market failure 2. Consumer surplus 3. Deadweight loss 4. Government failure 5. None of the above 44. Which of the following statements regarding price controls is true? 1. A binding price ceiling may result in an excess supply of a product. 2. The short run impact of a price ceiling is always greater than the long run impact. 3. Buyers will not be happy with a price ceiling because it forces them to pay a higher market price. 4. All of the above 5. None of the above. 45. Which of the following could we expect to happen if we impose a binding minimum wage on the labor market and employers are responsive to changes in the price of labor? 1. Job loss for unskilled workers. 2. Higher income for unskilled workers 3. Higher consumer surplus. 4. A labor shortage. 5. None of the above 46. (2 points) If ticket scalpers are able to sell tickets at above the official ticket price, then we know that: 1. There must be a shortage of tickets at the official ticket price. 2. The official ticket price must be below the market equilibrium price. 3. At the official ticket price, the quantity of tickets demanded must exceed the quantity of tickets supplied. 4. All of the above. 5. None of the above. 47. If we offer a subsidy to consumers of housing, we can be sure that: 1. The subsidy will be shared by consumers and producers of housing, with the larger share going to whichever is less responsive to price of housing changes. 2. The subsidy will be shared equally by consumers and producers of housing. 3. Consumers of housing will get the full benefit of the subsidy. 4. Producers of housing will get the full benefit of the subsidy. 5. The subsidy will be shared by consumers and producers of housing, with the larger share going to whichever is more responsive to price of housing changes. 48. If we offer a subsidy to workers, and workers and employers are responsive to price of labor changes, then: 1. The equilibrium price of labor will fall. 2. There will be too many hours of employment from an economic efficiency point of view. 3. Economic surplus will be reduced. 4. All of the above. 5. None of the above.

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